Costs and Production

Question 1

A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs.

Answer 1

Production Function

Question 2

with fixed land and capital, adding more labor will increase production

Answer 2

production function

Question 3

In order for labor to produce, it needs land and capital. With neither, production is zero

Answer 3

production function

Question 4

When capital is fixed, as labor increases, output increases but ultimately at a slower rate. Ultimately outputs maxes out and begins to decline

Answer 4

The measure of this added output as labor increases is marginal physical product (MPP) or just marginal product

Question 5

Accountants measure firm’s profit using rules laid down by the internal revenue service and the financial accounting standards board

Answer 5

their goal is to report profit so that the firm pays the correct amount of tax and is open and honest about its financial situation with its bank and other lenders
-economists measure profit based on an opportunity cost measure of cost

Question 6

The cost of the owner’s resources is his or her entrepreneurial ability and labor expended in running the business

Answer 6

The opportunity cost of the owner’s entrepreneurial ability is the average return from this contribution that can be expected from running anthers firm. This return is called a normal profit

Question 7

the opportunity cost of capital

Answer 7

normal profit

Question 8

____ is equivalent to an implicit cost

Answer 8

normal profit

Question 9

minimum payments required to keep owner in business

Answer 9

normal profits

Question 10

a payment made for the use of a resource

Answer 10

explicit costs

Question 11

the value of resources used in production even when no direct payment is made

Answer 11

implicit costs

Question 12

money paid for factors of production + depreciation (productive resources)

Answer 12

explicit costs

Question 13

opportunity costs of using resources owned by firm or provided by firm’s owners (no direct payments)

Answer 13

implicit costs

Question 14

payments a firm must make or incomes it must provide to resource suppliers to attract those resources away from their best production opportunities

Answer 14

economic costs

Question 15

Monetary value of all inputs used in a particular activity or enterprise over a given period

Answer 15

economic costs

Question 16

explicit costs + implicit costs =

Answer 16

economic costs

Question 17

____ costs can be identified by the accountant with a paper trail denominated in dollars

Answer 17

explicit costs

Question 18

____ costs are the cost of resources for which no payment is made– that is, the opportunity cost of using those resources. The can be identified only by the entrepreneur

Answer 18

Implicit costs

Question 19

total revenue less total costs

-return to owners above normal profits

Answer 19

economic profits

Question 20

TR - explicit costs

–used to determine taxable income (no implicit costs)

Answer 20

Accounting profits

Question 21

_____ profit equals a firm’s total revenue minus its opportunity cost of production

Answer 21

Economic Profit

Question 22

a firms’s opportunity cost of production is the sum of the _____ and the ____

Answer 22

explicit costs and the implicit costs

Question 23

____ profit is part of the firm’s opportunity costs, so economic profit is profit over and above normal profit

Answer 23

normal

Question 24

Economists include all costs in economic costs, both ____ and ____

Answer 24

implicit and explicit costs

Question 25

accountants include only ____

Answer 25

explicit costs

Question 26

Profit equals total revenue minus total cost

Answer 26

Economic profit, then, is smaller than accounting profit because more costs are subtracted

• economic profit = total revenue - explicit costs - implicit costs
• accounting profit = total revenue - explicit costs only
• economic profit = accounting profit - implicit costs

Question 27

a firm’s decisions respond to opportunity cost and economic profit
-a firms’s opportunity cost of producing a good is the best, forgone alternative use of its factors of production, usually measured in dollars

Answer 27

Opportunity cost includes both:

explicit costs and implicit costs

Question 28

those costs whose total does not vary with changes in short-run output

• must be paid even if output = 0
• overhead

Answer 28

fixed costs

Question 29

those costs which change with level of output, including payment for materials, fuel, power, transportation and labor

Answer 29

variable costs

Question 30

shows relationship between labor costs and output produced

• because weekly wage doesn’t change as more workers hired (variable inputs)
• reflects way output varies with variable inputs

Answer 30

variable cost curve

Question 31

sum of costs that dont vary with level of output

Answer 31

total fixed costs

Question 32

sum of costs that change with level of output

Answer 32

total variable costs

Question 33

the firm makes many decisions to achieve its main objective:

Answer 33

profit maximization

Question 34

some decisions are critical to the survival of the firm

• some decisions are irreversible (or very costly to reverse)
• other decisions are easily reversed and are less critical to the survival of the firm, but still influence profit

Answer 34

All decisions can be placed in two time frames

• the short tun
• the long run

Question 35

a period of production during which some inputs cant be varied

Answer 35

short run

Question 36

a period of production long enough for all inputs to be varied

Answer 36

long run

Question 37

theres more flexibility to var production in the long run than in the short run

Answer 37

-assume labor is variable input and capital is a fixed input in the short run

Question 38

the ___ run is a time frame in which the quantity of one or more resources used in production is fixed

Answer 38

short

Question 39

for most firms, the capital, called the firm’s plant is fixed in the ____ run

Answer 39

short

Question 40

the ____ run is a time frame in which the quantities of all resources– including plant size— can be varied
—–long run decisions are not easily reversed

Answer 40

Long

Question 41

Accounting: ____ and ____ run is based upon annual chronology

Answer 41

short and long

Question 42

Economics: ____ run has fixed plant capacity size

Answer 42

Short

Question 43

_____ run has variable plant capacity size

Answer 43

long

Question 44

the ____ run is a time frame in which the quantities of all resources– including plant size— can be varied
—–long run decisions are not easily reversed

Answer 44

Long

Question 45

Accounting: ____ and ____ run is based upon annual chronology

Answer 45

short and long

Question 46

Economics: ____ run has fixed plant capacity size

Answer 46

Short

Question 47

_____ run has variable plant capacity size

Answer 47

long